(Reuters) - Microsoft Corp has put its talks with media companies about an online subscription service for TV shows and movies on hold, according to people familiar with the discussions.

The technology giant had been in intense talks with potential programming partners for over a year and was hoping to roll out the service in the next few months. But it pulled back after deciding that the licensing costs were too high for the business model Microsoft envisaged, according to these people.

"They built Microsoft TV, they demoed it for us, they asked for rate cards but then said 'ooh ah, that's expensive,'" said one senior media executive who had been involved in the talks.

A representative for Microsoft declined to comment.

Early versions of Microsoft's TV service included a range of advanced features such as being able to change channels with voice and motion control.

Similar to Netflix Inc, Microsoft's service also would have allowed users the option of paying a monthly fee for a package of programming from someone other than a local cable or satellite TV company. But unlike Netflix, Microsoft had hoped to offer current shows and live networks on its service, which made it a much higher cost proposition.

Microsoft is still working closely with the TV business to distribute shows over the Web, but rather than playing a role in helping consumers replace their cable TV packages it is focusing on delivering programming via its Xbox gaming system to existing cable subscribers.

At the Consumer Electronics Show this week, for example, Microsoft and News Corp announced a partnership that will allow Fox Broadcast, Fox News, IGN and The Wall Street Journal to offer apps on its Xbox Live service.

Media company sources also said that even though talks with Microsoft had cooled off they held out some hope that the tech company would come back to the negotiating table.

"It doesn't mean they won't be back in another iteration. We'll have to wait and see," said the senior media executive.

Even as Microsoft pulls back from its original ambitions, Google Inc, Amazon.com and others have continued with a push to unravel the $100 billion U.S. cable television ecosystem dominated by major distributors such as Comcast Corp and DirecTV Group and program makers like Walt Disney Co and Time Warner Inc.

The Web TV newcomers are all chasing Netflix, whose online video and DVD subscription service has grown to more than 23 million users in the United States and this week debuted in Britain.

Netflix's success has left the cable industry conflicted. While program makers welcome the big checks that online video partners offer, they also fear that in the long run cheaper online video services will cannibalize the cable TV subscriptions that generate the vast majority of their revenue and profits.

To avoid that outcome, programmers, under extra pressure from their cable and satellite TV distribution partners, have asked for costly, long-term commitments from potential online partners who want newer TV shows and movies.

The distributors are also cutting Web TV deals of their own with the program makers. The best recent example is the 10-year programming agreement between Comcast and Disney, a deal that will eventually offer a vast amount of Disney's cable shows online for the first time to paying Comcast TV subscribers.

"This is an expensive business," a second media executive with knowledge of the situation said, referring to the cost of producing top quality TV shows and movies.

Netflix ( NSDQ: NFLX) has been hit with a class-action suit by a group of disgruntled investors who claim the online movie-rental chain withheld information from them prior to its steep stock-price plunge over the late summer and fall.

The lawsuit was filed in U.S. District Court in Northern California, by the City of Royal Oak Retirement System, and seeks compensation for all shareholders stock who purchased Netflix stock bwetween December 20, 2010 and October 24, 2011.

The complaint claims Netflix senior management didn’t disclose that many of its contracts to stream content were short term and would soon have to be renegotiated at substantially increased cost. It also states that CEO Reed Hastings made $43.2 million selling 190,000 during the period in question.

It says the defendants violated section 10(b) of the Securities Exchange Act of 1934. The provision forbids manipulation or deception in the securities market, and has been invoked in thousands of investor related lawsuits.

The investors are represented Robbins, Geller, Rudman & Dowd LLP, a firm that specializes in corporate class actions, and has won large verdicts against companies like Enron and AT&T ( NYSE: T). Class action law firms typically attempt to force a settlement from firms and then take a commission of around 25 percent.

A Netflix spokesman has yet to respond to an inquiry made late Monday by paidContent.

Netflix stock was trading on the NASDAQ at $291.27 per share on July 12, the day before Netflix announced separate charges for streaming and DVD and a 60 percent price increase for some subs. It quickly abandoned an attempt to spin off its disc-rental operation. The moves that were rejected by consumers and investors alike.

Netflix stock closed after-hours trading Friday at $94.79 a share. On Tuesday, company shares were up almost 2 percent in mid-afternoon trading.

The suit, posted on the law firm’s site, contends:

“At the beginning of the class period, Netflix was facing increasing competition for streaming business, and content providers were exploring new ways to distribute their content and/or maximize their licensing fees, … Rather than fully disclose the devastating cost increases which were then threatening Netflix’s entire business, the defendants talked about [their] ability to grow.”

The suit also notes that Netflix senior managers sold many of their shares when the stock was high, netting $90.2 million between them. It doesn’t cover the circumstances of those sales—whether or not they were pre-scheduled, for instance, or how much stock those managers may have acquired.

People begging for a Netflix competitor don't seem to grasp how much of a lead the company has. To succeed in this, you need a whole set of pieces (viable library, apps on most appropriate devices, streaming infrastructure, customer base) that are really hard to build once there's a strong incumbent.

All the recent talk of decline at Netflix was incredibly stupid, and going forward, we'll see why.